Recently, Raghuram Rajan while vacating his post as Governor, RBI, gave India a parting gift. Last week, National Payments Corporation of India (NPCI) announced that bank applications for UPI have officially started. This means that Unified Payments Interface (UPI) which was officially launched in April this year is now live, and connected to 21 banks.
What is UPI? Effectively UPI turns our smart phones into a bank. Imagine a scenario where you have to make multiple payments. Even today, that’s quite a task! Even to initiate an electronic transfer means getting account numbers, branch details, IFSC codes among others. This is where a system like UPI can be revolutionary.
UPI’s genesis can be traced back to the RBI Payment System Vision Document (2012-15), where the central bank laid down the goals of universal electronic payments, a less cash society, and financial inclusion, using the latest technology trends. The UPI now looks to provide a payments architecture that can fulfill this goal.
In a nutshell UPI will make paying and receiving payments as easy as swiping a phone book entry or making a call on mobile phone. “Everyone who has an account should be able to send and receive money from their mobile phone with just an identifier without having any other bank/account details. All they need to do is to "pay to" or "collect from" a “payment address” (such as Aadhaar number, Mobile number, RuPay Card, virtual payment address, etc.) with a single click,” says the RBI.
This is revolutionary, not just because of the impact of such an innovative but still simple solution on financial services and flow of funds across the Indian economy, but also because this will facilitate the immediate payments leveraging trends such as increased smartphone adoption, Indian language interfaces, and universal access to the Internet and data.
An electronic system of money transfer is already available in the form of NEFT transfers, but the biggest drawback of the system is that it is not 24x7 and is not immediate. IMPS, as an existing system, does allow instant payment transfers, but is complex. You need a seven-digit Mobile Money Identifier (MMID) number, have your number linked with the bank and also need a mobile personal identification number (MPIN) to authenticate the transaction. Confusing and a long drawn out process meant the takers for IMPS has always been low. UPI is based on the same IMPS platform, but has a huge difference. It is instant, simple, seamless and can be functional and is used by almost anyone.
P2P lending will be a big beneficiary. Today flow of funds from lender to borrower and repayments from borrower to lender are one of the biggest challenge faced by P2P lending platforms. UPI not just makes this process faster and seamless, it integrates well with P2P lending’s target of financial inclusion. Now imagine a lender in Mumbai and a borrower in Kashipur, Uttrakhand. As soon as they finalize the loan agreement between them, irrespective of time, bank holiday, weekend; the money will be with the borrower in matter of minutes. Similarly, EMIs will reach the lender timely. In a country like India, sending and receiving payments at the click of the mobile phone can be a great boon for millions.